2022 was a volatile year for nickel investors, highlighted by significant price swings as a result of the London Metals Exchange (LME) short squeeze. Despite the volatility, nickel had a strong year returning 43%, and since the pandemic nickel is one of the best performing commodities, up 95% – significantly outperforming the broader Bloomberg Commodity Index which was up 34%.
Driving strong price gains is the fact that inventories for many commodities (e.g., zinc, copper and nickel etc.) are at historical low levels. Nickel has the most acute shortage, with inventory levels sitting 80% below the 5-year average.
As we’ve covered previously at Capital10x, global producer Vale is well aware of the nickel opportunity and is racing to build a battery metal refining operation in Canada. Vale has publicly acknowledged the nickel industry will need to spend an additional $20bn this decade for supply to have any chance of meeting demand.
The demand outlook for nickel has never been brighter, but if we turn and look at the stock performance of global nickel producers, the supply urgency is nowhere to be found.
Even with strong fundamentals, an eye-opening gulf between performance of the commodity and the companies that mine nickel has emerged. In 2022 the price of nickel was up 54% while a basket of global nickel miners was down a whopping 40%.
A 94% spread in less than 12 months sends a powerful message about the disconnect between industry fundamentals (the commodity price) and investors expectations (the stock price).
A rising nickel price means more profits for nickel miners, but stock prices haven’t gotten the message, which creates an opportunity for investors with a time horizon of more than a few months.
China Reopening Will Reignite Nickel Demand
China’s reopening has brought a more positive demand outlook leading into the new year. China has significantly reduced its Zero-COVID policy, ending quarantine for inbound travelers, and the free movement of citizens between Hong Kong and the mainland. Investors are hoping that the revitalization of the $17 trillion Chinese economy is upon us, after suffering for 3 years under stringent lockdowns and a loss in growth not seen in 50 years.
Nickel spot prices were significantly higher last month, and LME inventory rose.
As we’ve previously noted, Canada is a major player in nickel supply and in resource. Three of the eight largest mines in the world are located in Canada.
On top of production, Canada possesses about 7% of global nickel reserves. Deposits in Canada are high-grade and produce less CO2 during the extraction process than in other major jurisdictions, such as Indonesia.
Growing emmissions sensitivity among investors will help Canada grab mining market share from emerging markets that previously won the lion’s share of investor capital.
The Canadian federal government has now got the message and is implemented a Critical Minerals Strategy. According to their literature Canada’s Critical Minerals Strategy will increase the supply of responsibly sourced critical minerals and support the development of domestic and global value chains for the green and digital economy. The Strategy’s five core objectives are:
• Support economic growth, competitiveness and job creation
• Promote climate action and environmental protection
• Advance reconciliation with Indigenous peoples
• Foster diverse and inclusive workplaces and communities
• Enhance global security and partnerships with allies
The most promising portion of this strategy is the commitment to build out a critical minerals supply chain. The 2022 budget provides $1.5 billion for infrastructure development for supply chains, focusing on priority deposits.
The government plans to support the sector by investing in sustainable energy and transportation infrastructure to support industrial development, priority mineral deposits and facilitate international trade.
The investments are poised to support economic growth by filling in the gaps in enabling infrastructure to unlock mineral deposits. Investment would also complement existing energy and transportation programming, including the Canada Infrastructure Bank (CIB), Transport Canada’s National Trade Corridors Fund (NTCF) and NRCan’s Smart Renewables and Electrification Pathways (SREPs) Program. This is a timely investment as it anticipates commodities boom and coming nickel super-cycle.
What Canadian Miners will Benefit from the Growing Supply/Demand Mismatch in Nickel?
Three domestic small caps are on our radar, Canada Nickel (TSXV: CNC) (OTCQX: CNIKF), Grid Metals (TSXV:GRDM) (OTCQB:MSMGF) and Quebec Nickel (CSE: QNI) (OTCQB: QNICF) each in a different part of the nickel supply chain and with unique advantages.
These three companies look well positioned to take advantage of the nickel super-cycle, but are largely unfollowed by investors which means the coming nickel supercycle is definitely not priced in.
Canada Nickel (TSXV: CNC) (OTCQX: CNIKF)
Canada Nickel, the first company on our list and the largest, owns the Crawford Project. At full production Crawford will be the fifth- largest nickel sulfide project in the world and is estimated to contain 3.5 million tons of nickel making it the fifth largest from a resource perspective as well.
A resource base of that size is a huge advantage on its own, but Canada Nickel also stands apart with its focus on lowering the significant carbon emissions that typically come from mining. Canada Nickel’s carbon sequestration technology – called In Process Tailings Carbonation or IPT – will be a game-changer for the industry.
Tests so far have shown it would help the Crawford Project achieve Net-Zero carbon emissions and produce 98% less emmissions that Indonesian mines and 70% less than a typical high-grade mine in the developed world.
Low emmissions will help limit interference from the Canadian government, which takes the Paris climate goals extremely seriously while also making it easier for Canada Nickel to raise capital from large investors who are increasingly taking ESG factors into account when deciding how to allocate money.
Grid Metals (TSXV:GRDM) (OTCQB:MSMGF)
Grid Metals, the second company on our watch list, has high potential PEA stage nickel and copper assets in Manitoba. The company owns property in the Fox River Belt which the team believes is a dead look-alike for the Raglan Belt in Northern Quebec, a prolific nickel sulfide region currently being produced by global mining giant Glencore and others.
Dave Peck, VP of exploration at Grid has personally made discoveries for Anglo American in the Raglan Belt and knows the geology as well as anyone in the industry. He is the one leading the charge at Fox River, putting Grid in good hands.
Mr. Peck has said publicly that he believes with some capital and persistence, Fox River will become a world class nickel resource.
On top of nickel exploration potential, Grid has signed one of the smartest and most unique production agreements in the history of Canadian lithium mining.
Grid’s lithium assets are next door to the Tanco lithium project which is the only producing lithium mine in Canada currently. Due to Grid’s fortunate geography the company will be able to bring lithium assets into production in only 2-3 years instead of the typical 5 by using Tanco’s processing assets.
Grid Metals offers investor’s a unique way to play nickel, with additional flexibility and upside from other critical battery metals like lithium and copper.
Quebec Nickel (CSE: QNI) (OTCQB: QNICF)
Quebec Nickel, the third company on our list, is an explorer and gives investors exposure to the earliest part of the mining value chain. Quebec Nickel has indicated Class 1 nickel deposits in the Abitibi region of Quebec – one of the best jurisdictions for battery metals in the world.
Quebec Nickel has had significant early drilling success. The company made an announcement in August regarding their drilling holes 28 and 29. They reported 1.44% percent nickel (other companies in the region have reported 0.2%-0.6%).
Alongside the nickel, they also are extracting 1.5% copper plus almost 3 grams of platinum, palladium, and gold for each pound of rock.
Not only is the Abitibi a world class resource, it also sits close to all critical infrastructure, which is key to bringing resources to market. There are 3 processing plants in the construction stage in Quebec, and the company’s projects have great site economics and nearby infrastructure.
Quebec Nickel has moved to three drilling rigs working 24/7 in 2023 from only 1 in 2022 so will have significant drilling catalysts to come this year.
A SUPERCYCLE COULD BE BREWING FOR NICKEL
There has been a decade of underinvestment in nickel and no Class 1 nickel discovery in Canada in 80 years. Yet this doesn’t mean Canada doesn’t have fantastic regions for mining, such as Sudbury, Ragland, Thompson and the Abitibi.
The government is finally realizing the potential for Canada to become a world class supplier of battery metals and stands ready to support future projects in a number of different ways.
On top of stronger government support, exploding demand for nickel from car and storage battery applications mean nickel prices have to go higher to incentivize more nickel production and exploration. Higher prices will mean higher margins, profits, dividends and buybacks in the nickel mining sector.
With stocks still stuck in first gear, while nickel demand and prices are quickly accelerating, we think its only a matter of time before prospective companies like the three mentioned above begin to price in the reality of the coming nickel supercycle.
Canada Nickel is a market awareness client of Capital 10X. For more information, including potential conflicts of interest please see our Content Disclaimer.
